New Approaches to Economic Challenges: An OECD Agenda for Growth

Ladies and Gentleman,Thank you for this opportunity to present the OECD’s agenda for growth and our initiative on New Approaches to Economic Challenges. I think you’ll agree that now more than ever, we need to shine a brighter light on these issues. Before I expand on this, let me first describe some of the economic and social realities we all face.

We are now into the fifth year of the greatest economic crisis of our lifetimes. The OECD Economic Outlook published in May projected GDP growth across OECD countries to be 1.6% in 2012. In the UK, real GDP was projected to increase by only 0.5% this year and by 1.9% in 2013 . Two weeks ago I launched the OECD Employment Outlook in which we projected the unemployment rate to remain at 7.7% in the OECD area. Some 48 million people are still unemployed. 14 million jobs would need to be created to bring the employment ratio back to pre-crisis levels.

And to make the outlook even grimmer, we have recently seen clear signs of further deterioration in global economic prospects. Indeed, the growth and employment projections reported in our Economic Outlook are likely to be overly optimistic.

It is therefore imperative to take action. Those countries that still have room for manoeuvre should coordinate and implement additional fiscal and monetary measures to support demand and boost job creation. G20 Leaders agreed to do this in the Los Cabos Action Plan, should conditions deteriorate significantly. Well, unfortunately, they have.

We are by no means out of the woods yet…Let’s not forget about our unfinished business! Without a satisfactory resolution of the euro area banking and sovereign debt crisis, we will just keep on kicking the can down the road. The outcomes of the recent Euro Area Summit (28 June) and ECOFIN meeting (9-10 July) provide some welcome developments towards a banking union in the euro area, the recapitalization of Spanish banks, and support for Cyprus. But much more needs to be done to put Europe back on a sustainable growth path, to restore its public finances and to put its people back to work.

But this is not just about Europe…The global crisis has left policymakers around the world a number of unwanted legacies; low growth, rising unemployment and inequality, high budget deficits and debt. It is destabilizing market and public confidence. Competition and productivity must be restored!

We must resolve these issues while also addressing longer-term challenges that will change the environment we live in for the coming decades. Wealth is shifting from North to South; from West to East, and the climate is changing. Populations are growing in emerging and developing countries, while ageing in developed economies. As those at the top grow wealthier, so does the gap between the rich and the poor. We need to tackle these persistent and long-standing trends.

How can we best prepare ourselves for this new global economic landscape while addressing current challenges? At the OECD we advise governments to move forward in three parallel tracks – to “Go Structural, Go Social and Go Green”.

Go StructuralStructural reforms are a pivotal rung on the ladder to prosperity. They can encourage entrepreneurship - a central pillar of growth - by making it easier for new and existing businesses to bring fresh ideas to fruition. They can induce competition; promote innovation and research and development across regions and industries. Education measures can help put people back to work as more productive, skilled employees.

Structural policies can tackle labour market dualities to reduce inequality and strengthen pension systems. There is also deregulation, health, taxes, labour markets, product markets, and infrastructure. And these are just a few examples, not an exhaustive list.

Structural reforms don’t take generations to materialize. Our analysis finds that well-targeted and packaged structural reforms can deliver results faster and more efficiently than generally expected. And reforms are not necessarily painful. If properly designed, short-term pain can be minimized by exploiting synergies amongst complementary policies.

Some countries have already begun. Others are reaping the benefits of structural reforms implemented prior to the crisis. For example, the UK reports saving £12bn in just five years through tax reforms .

And the UK government remains committed to structural reforms, as evidenced by its support for the key findings in the Vickers Report. These recommendations will make financial markets more stable and competitive. Ring-fencing retail and investment banking activities and requiring larger equity capital can protect citizens from the volatility of markets. Measures to promote competition for consumers and small businesses will better serve customers. These combined efforts will create a banking environment that is more transparent, stable and just.

The OECD is supporting these structural efforts. We work with European policymakers to add a medium and long-term perspective to their short-term challenges, with China and other emerging economies to improve educational attainment , and with Iceland to accelerate public sector reform. And these are just a few examples of our efforts to help countries implement ambitious reforms. Now more than ever, policy makers must forcefully act to follow them through. And the private sector has a key role to play. Without proper implementation, structural reforms lose the power of their punch.

Go Social

Structural reforms can also tackle the rising social costs of this crisis. This is particularly true in countries with high long-term and youth unemployment. The UK knows this problem well. One in five young people in the labour force are out work .

Income inequality is also rising in the UK. The average income of the richest 10% is now about ten times that of the poorest 10% – a ratio of 10 to 1. We see this trend in all OECD countries, but the average ratio is lower, at 9 to 1, although it was 7 to 1 in 1985.

Rising inequality is one reason to “Go Social”. Addressing this issue not only improves well-being, it can also restore balance, competitiveness and productivity. Tax, health, social security, and other policies are needed. But it is particularly important that countries focus on education and skills.

Skills are the global currency of the 21st century. Without adequate investment in skills, people languish on the margins of society, technological progress does not translate into economic growth, and countries can’t compete in today’s economies.

There are plenty of unemployed graduates on the streets, while employers search in vain for people with the skills they need. This tells us that skills do not automatically translate into better economic and social outcomes. A shift from “lifetime jobs” to “lifetime employability” is required. This means investing in skills throughout the life cycle; from early childhood, through compulsory education, to the transition into the workforce and beyond. It also means developing strong links between the world of learning and the world of work.

The UK has world-class tertiary education, but secondary education performance, as measured by OECD PISA scores, is lacklustre. 18% of 15-year-olds in the UK do not reach basic PISA levels of reading proficiency. And there is still a strong correlation between student performance and socio-economic background, which is much weaker in the best education systems. This further exacerbates rising levels of youth unemployment and inequality.

The OECD recommends developing programmes to help at-risk students early on, to satisfy each child’s needs, and to raise standards uniformly. Beyond compulsory education, the UK's efforts to develop the quantity and quality of apprenticeship are commendable. But more can be done. It is essential to ensure learning extends beyond textbooks and training programmes. The OECD Skills Strategy offers governments’ useful methods to encourage life-long learning, which will feed into the UK’s recently announced Richard Review on apprenticeships.

Go Green

As well as going social, we also need to “Go Green’’. When I say this, people say, Gurría, Give me striped growth, checkered growth, yellow growth – but green growth, now? Well, the costs and consequences of environmental inaction could be absolutely colossal, both in economic and human terms. Older generations can say they didn’t know – but we know the difference, we have no excuse. Without immediate action by 2050 we will see:

a 50% increase in greenhouse gas emissions, with a disastrous impact on the quality of life worldwide;

a doubling of premature deaths from exposure to particulate air pollution;

2.3 billion more people living in severely water-stressed areas, bringing the total to about 40% of the world’s population; and

a further 10% decline in global terrestrial biodiversity.

We are on a collision course with nature. We will not overcome these huge environmental challenges in isolation. They must be managed in the context of other global issues, such as food and energy security, poverty alleviation and our wider growth agenda. Well designed policies to tackle one environmental problem could also help alleviate others, and can contribute to growth.

We need a deep shift towards greener and more innovative sources of growth, and towards more sustainable consumption patterns. Amongst others, we must introduce bold policy options to help governments make pollution more costly; remove environmentally harmful subsidies; value and price the natural systems and ecosystem services; and encourage green innovation.

The UK government has a ‘’green growth’’ agenda. For example, the commitment to raise the share of environmentally related taxes in total tax revenues, which in 2010 was about 7.4%, already above the weighted OECD average. Or, the commitment to green infrastructure in the national infrastructure plan. But more could be done, such as removing the reduced VAT rate on energy products or better targeting winter fuel allowances. Finding the most cost effective ways of boosting growth, while also delivering positive environmental outcomes is a priority.

But we also need to find new approaches to economic challenges…

The global economic crisis has been a wake-up call to policymakers around the world. The economic meltdown of 2008 exposed serious flaws in the underpinnings of mainstream economics. The idea of a self-adjusting growth model with a single general equilibrium has been seriously challenged.

As an international organization, we need to look at ourselves in the mirror. Perhaps, like banking regulators and supervisors, we didn’t see the train coming.

That’s why the OECD has launched the “New Approaches to Economic Challenges (NAEC),”- to take a look at the overall structure of our thinking and its effectiveness. This initiative will enable us to identify the root causes of the crisis and more importantly, take stock of the lessons learnt from it. This isn’t about writing a book, or holding a seminar. This is about taking a cold, hard look at policy.

How do we hope to do so?Firstly, we’ll take a step back and look at broad relationships in our economic models. We will examine macro and micro linkages - like the balance between growth and adjustment. We’ll probe the relationship between structural objectives - like employment and the environment, and the process of determining financial outputs - like the pricing of risk.

But we’re also going to zoom in. We’ll investigate how policies impact each other. For example, do pro-growth policies exacerbate income inequalities, or drive environmental degradation? Do policies encouraging innovation intensify the widening disparities between our worker’s talents and our employers’ needs?

Pinpointing mutually reinforcing policies is essential. We are already aware of many opportunities for double or triple dividends. Effective employment, education and skills policies can reinforce growth, employment and social equity objectives. Deepening our understanding of unintended consequences and policy synergies will help us get back on track for the long-term – which is, of course, NAEC’s main goal.

NAEC also aims to unearth new sources of growth. This exercise will enable us to take heed of fresh opportunities blooming in our globalised world. Let me provide you with two examples.

Firstly, international trade is no longer a zero sum game. Firms now organize production through regional and global value chains. Intermediate inputs make up the majority of global services and world’s goods trade. In essence the production process has been “sliced-up” and distributed across the globe. We need to reconsider our economic models in light of the complex interdependencies that govern the international trading system.

Secondly, the transition to a knowledge based economy is also changing our global frontier. As the economic role of knowledge based assets– software, databases, marketing, and new organizations – grows stronger, so does the potential for new sources of economic growth. NAEC will also examine how to optimize growth in this realm. This will help countries develop a new type of growth that is stronger, cleaner and fairer – and most of all, more resilient.

Ladies and Gentlemen,

The crisis has forced us to engage in a true soul searching exercise – to see where we stand, where our models have failed, and where we need to go. This is a great opportunity, a great responsibility for future generations. We will be remembered in future for what we are doing now. Tomorrow’s generations depend on us to leave them a world where they enjoy better policies for better lives. Let’s not disappoint them!